How do pawn shops work?

Pawn shops buy and sell goods, but they also offer customers the option to pawn their items in exchange for a cash loan.

The stigma surrounding second-hand shopping at establishments like thrift stores and pawn shops is slowly disappearing.

Pawn shops differ from other kinds of second-hand retailers in that they not only buy and sell goods, but they also allow customers to pawn goods as collateral in small, short-term loans.

The revival of second-hand shopping

Second-hand shopping for everyday items such as clothing and décor in thrift stores, car boot sales, and pawn shops is by no means a new concept, but it is becoming increasingly de-stigmatised and popular with each new generations.

Shopping for pre-loved goods is a great way to find unique pieces that will suit your personal style and a tight budget.

In fact, most thrift stores and pawn shops often have a great selection of useful and niche items that can easily be re-used or re-purposed.

How do pawn shops work?

Pawn shops often stand out among other kinds of second-hand shops because they have a tri-fold purpose. Instead of only selling items like charity shops and thrift stores usually do, pawn shops buy, sell, and pawn goods.

Most pawn shops have an inventory of stock which is available for customers to purchase at any time, just like any other retail store does.

However, while some of this stock is simply purchased from vendors or people who want to sell these items to the store, some of them are in the store as a product of a pawn brokerage deal.

Pawn brokerage is often a difficult concept to grasp. The simplest way to look at an item that you have pawned at a pawn shop is to see it as collateral for a short-term loan.

In the United States, pawn brokerage is regulated slightly differently in each state, but in general, every pawn transaction will follow a process similar to what is listed below:

• Step 1: You bring in a valuable item and pawn it as collateral for a short-term loan
• Step 2: The pawn broker determines the value of the item and the amount of credit that it will justify, which is usually paid out to you in cash after you have signed a credit agreement
• Step 3: You receive a pawn ticket
• Step 4: If you repay the loan with interest within the timeframe outlined in your credit agreement, you will get your item back, but if you do not repay the loan plus interest, your pawned item may be put up for sale. Some pawn shops may allow you to extend your timeframe for a fee

How are pawn transactions regulated?

Pawn shops are heavily regulated on the federal, state, and local municipal levels in the United States.

This means that although one pawn shop may differ from the next slightly (if they are in different locations), there are special laws in place to ensure that they are trustworthy and cannot be accused of unscrupulous lending.

In most states, pawn brokers even have to communicate with their local police department at the end of every business day to ensure that they have not accidentally pawned stolen items.

Which items can you use to pawn?

While some pawn shops are highly specialised and focus on goods like sports memorabilia or military items, most will accept just about anything that could earn them a profit if they have to sell the pawned item in the store later on.

However, if you need a large amount of cash fast, your best bet is usually to pawn something that is small, but in high demand. This includes electronics, musical instruments, and jewellery.

How do pawn brokers determine the value of your short-term loan?

When you first take your item into a pawn shop to pawn it, the pawn broker will have to determine the value of the item first. They do this so that they can give you a loan for a percentage of what the item is actually worth.

Usually, a pawn broker will assume that they can re-sell your item for about 60 percent of its value, and therefore your total loan amount will usually be lower than 60 percent of the value of your item.

However, since pawning an item can be regarded as a short-term loan agreement, you will also have to pay interest on the loan amount for as long as the amount is outstanding.

Some pawn shops also add other fees to the total sum that you will have to pay back, in order to get your item back within the allotted timeframe.